Risk identification system and methods

ABSTRACT

The present invention relates to a system and methods by which the risk associated with a new opportunity or new or ongoing relationship may be assessed. An example of such new opportunity or new relationship for which the present invention may be used to assess the risk is that concerning a potential new customer of a financial institution. The risk assessment of the present invention may be used to assess whether a new customer should be taken on as a customer and, if so, to what extent should the possible full range of account benefits be provided to the new customer. Other applications include assessing risk regarding a candidate for employment, assessing casualty loss and/or repayment risk in the insurance industry, and assessing risk in a landlord tenant relationship to determine whether or not to rent to the prospective tenant and if so, the amount of the security deposit.

FIELD OF THE INVENTION

The present invention relates generally to risk and its assessment. Inparticular, the invention relates to a system and methods by which therisk associated with a new opportunity or a new or ongoing relationshipmay be assessed, such as by businesses and institutions including thosein the banking, thrift securities, insurance and credit industries, aswell as the credit union movement. Among other applications, the systemand methods may be used, for example, to assess whether a candidate foremployment should be hired, and, if so, what responsibilities should thenew hire be provided, the scope of responsibilities that a new orongoing employee may be provided, whether a possible new customer shouldbe taken on as a customer and, if so, to what extent should the fullrange of account benefits be provided to the new customer, and whetherthe range of account benefits previously provided to a customer shouldbe eliminated altogether, narrowed, or expanded.

The present invention may also be used to assess risk in a landlordtenant relationship. The landlord can assess the risk of a prospectivetenant in order to determine whether or not to rent to the prospectivetenant and, if so, the amount of the security deposit.

Another application may be used in the insurance industry to assesscasualty loss and/or repayment risk. Oftentimes after a loss, forexample, a dwelling fire, the insurance company reimburses the homeownerfor expenses as they are incurred. The present invention allows theinsurance company to assess risk and allow reimbursement payments to bemade in advance in the appropriate cases expediting the process andlower costs.

BACKGROUND OF THE INVENTION

Risk is a generally quantifiable measure of the likelihood of loss orless than expected results. Risk assessment is the process of analyzingsuch likelihood of loss or less than expected results or threats to andvulnerabilities of a system. Businesses and institutions assess risk ona daily basis and in a variety of contexts. For example, whether toengage a contractor to provide the services that the contractor claimsit can provide involves an assessment of risk. The business must try toanswer questions such as what is the likelihood that the contractor willbe able to provide the services to the degree or quality requested or atthe price or in the time frame stated. Whether to hire an individual asa new employee also involves an assessment of risk. Will the individualbe able to perform as expected? Risk analysis with respect to potentialnew hires does not end there. While the individual may be suitable as anew hire, how much responsibility should the individual be given isanother question the employer must try to answer. Should the new hire begiven responsibility to handle the accounts of, for example, theemployer's best customers? What about confidential or trade secretinformation? Should the new hire be given access to the some or all ofthe confidential information of the customers or access to sensitive orvaluable inventory? Should the new hire be given access to the onlycertain or all of the confidential information of the employer.

Employers can also use the present invention to assess risk for newemployees and the level of inventory security or access. Employers oftenhave varying levels of inventory access such that some inventory iseasily accessible while other inventory, such as inventory that is proneto loss, may be accessed only through additional security access. Thepresent invention can assess the risk of each new employee to determinethe level of inventory access.

Businesses and institutions in the banking, thrift securities, insuranceand credit industries, and the credit union movement also assess riskwith respect to a variety of services and financial instruments. Forpurposes of this application, the term “financial institution” willrefer to banks, businesses and institutions in the banking, thriftsecurities, insurance and credit industries, and the credit unionmovement. A check is a commercial device intended for use as a temporaryexpedient for actual money. It is generally designed for immediatepayment and not for circulation. A check is drawn on a bank or creditunion. Immediately on presentment of the check, the financialinstitution is required to pay from a previous deposit of funds.Further, for purposes of this application, the term “check” will broadlysignify any means by which the transfer of property from an account willbe requested and will include those transfers also known by the terms“draft” and “sharedraft” and “negotiable instrument” and instruments andtransfers that are within the definition provided by Section 3-104 ofthe Uniform Commercial Code. In the broad sense used within thisapplication, the term “check” will also signify the requests processedby automatic clearing houses, electronic presentations and debit cardand ATM transactions and all electronic presentations.

From time to time, checking account holders may accidentally orintentionally misuse the account. The term “checking account” isgenerally recognized as including the terms Demand Deposit Account(“DDA”), electronic account, paper account, reservable/non-reservabletransaction account, interest bearing account, sharedraft account,Negotiable Order of Withdrawal account (“NOW”), deposit account, MoneyMarket Deposit Account (“MMDA”), Automatic Transfer Service account(“ATS”), escrow account, or any type of transaction account, or forpurposes of this application will identify also any account in whichfunds are deposited or withdrawn.

The financial institution may allow the customer to draw one or morefinancial institution checks against the customer's account when thetotal amount of the check or checks exceed the amount in the accountavailable for such purposes. A checking account, however, in itssimplest form does not contractually obligate the financial institutionto honor checks written by the customer that overdraw the account. Forpurposes of this application, the term “overdraft” will identify thatwhich results when a transfer of property is requested but for which theaccount from the transfer is requested does not have the property in theamount or type identified in the request.

A financial institution has a number of options when a check ispresented to it for which the customer does not have sufficient funds inthe designated account. Some of the options require the financialinstitution to have an agreement in place with the requesting partybefore the financial institution can exercise the option.

One of the options that a financial institution may employ with respectto an overdraft is that the financial institution may transfer propertyfrom another account. The account may be one in which money is held sothat a request for the payment of money can be handled without anotherstep. The account may be one also in which one or more forms of equitiesare held so that a request to pay money requires that one or moreequities be sold first. This option is one which is pre-arranged by thecustomer and the financial institution.

Another option that a financial institution may employ with respect toan overdraft is that the financial institution may transfer propertyaccording to a prearranged line of credit or a loan account of any loanaccount type. The decision to allow a line of credit on an individualaccount as well as the amount of the line of credit is determinedthrough generally accepted loan underwriting criteria as well as factorsapplied by the financial institution through an employee who hasexpertise in such areas, for example a loan officer.

A third option that a financial institution may employ is simply toreturn the overdraft without making the requested transfer. This may betermed the “not sufficient funds”, or “NSF” approach. The returnedrequest may be considered as being “bounced”. Often times, a financialinstitution charges a fee to the customer that drew the overdraft. Thisfee, at the very least, is intended to cover the administrative costsassociated with handling the request. If it exceeds the costs associatedwith the handling the overdraft, the fee may be a punitive measure. Thepayee that did not receive the intended transfer may also charge thedrawor a fee that may, at least, cover the drawee's administrative costin seeking and obtaining the designated payment.

As a fourth option, a financial institution that is confronted with anoverdraft can also cover it with the financial institution's ownfunds—thereby causing the account to be overdrawn. The financialinstitution will employ this option only when the financial institutionis confident that the customer will be able to cover the deficit in thenot too distant future. Such treatment is typically reserved for thefinancial institution's better customers, such as those having a longterm relationship with the financial institution and possible otheraccounts. Even with this option, the financial institution usuallycharges a fee for the overdraft.

A financial institution that does cover an overdraft typically does soin one of two ways: (1) at the item level such that a bank employeeanalyzes each item presented that would overdraw an individual's accountand makes a determination to pay or not, or (2) at the account level,but only up to an amount that is pre-set across the board for alloverdrafts. For example, the financial institution may adopt a policythat provides that only those overdrafts that total no more than $500.in excess of the funds available in the customer's checking account areto be honored. Such a policy is advantageous to the financialinstitution in that it limits the risk it has to any one customer to aset low level. Such a policy, however, may be disadvantageous to thecustomer who is keenly interested in ensuring that, if any overdraftsare honored, those that may be larger in amount (than the low limit setby the financial institution) and are directed to important debts arehonored. The typical size of payments to cover larger debts varies fromlocation to location. For example, while a typical mortgage or realestate tax payment in a rural area may be a small amount (say less than$1000.), the same type of payment in a developed or developing urbanarea would likely be greater in amount (say more than $1000.). Thus, anoverdraft service set by a national financial institution of, forexample, $500., may be meaningless for critical payments, such as thosefor rent, mortgage, car, tax, and insurance purposes. For purposes ofthis application, payments that are needed to maintain some propertyright or benefit are termed “critical payments”.

A financial institution that does adjust its overdraft limit for anindividual customer does so but only generally after the financialinstitution has some extended experience in working with the customerand learning the customer's check writing habits. This requires thefinancial institution to expend critical resources (such as the time ofthe account representative assigned to handle the customer's account orthe operations person assigned to handle the customer's account). It iscertainly an approach that a financial institution can take only withrespect to a few customers. Also, while the account representative maybelieve it is clear what the check writing habits of the customer are,this takes the financial institution time.

Rather than addressing the matter on an ad hoc basis, the financialinstitution may anticipate that the customer may draw an overdraft fromtime to time. For example, the financial institution and customer mayenter into an expanded relationship under which the financialinstitution provides the customer a line of credit tied to thecustomer's checking account. The financial institution would then beobligated to pay on checks up to the maximum amount of the line ofcredit provided for this purpose. This expanded relationship withcustomers is commonly marketed by financial institutions underdesignations such as “overdraft protection”, “check-protection”, or“checking-plus” personal financial banking accounts. For drawing checksfor which the checking account has insufficient funds, and employing thedesignated line of credit, a customer typically pays, at the least, on aper transaction basis and the interest for the credit actually extendedto the customer.

The customer may avoid overdrafts also by pre-authorizing the financialinstitution to tie the customer's checking account to one or more of thecustomer's other accounts such as the customer's deposit accounts. Thefinancial institution, when presented with a check that exceeds theamount in a customer's checking account, “sweeps” the necessary funds tocover the check from the designated deposit account or accounts.

While a number of different options are available to customers by whichthe customer may have overdrafts handled automatically, most customersdo not take advantage of them. Customers are attracted to financialinstitutions by the low fees associated with simple checking accounts.Customers are wary of the fees associated with any extra services thatfinancial institutions are capable of rendering such as those with linesof credit or sweep accounts. Also, customers do not wish to spend thesmall amount of time needed to set up the lines of credit or sweepaccounts. Further, customers may not have the funds to establish anotheraccount—or may not have the funds in a “liquid” form. “Liquid means cashor the equivalent that can be converted to cash within a specified timelimit. For example, a CD is not liquid because it cannot be converted tocash prior to its due date without a substantial penalty. Most customersadditionally do not anticipate overdrawing their checking account.

Accordingly, financial institutions find themselves in the position ofhow to handle overdrafts for a large number of customers. Without aprotocol in place for such customers not covered by one of the financialinstitution's other account programs designed to cover overdrafts—suchas a sweep account or a checking account with a line of credit—, thefinancial institution must determine whether in all cases to simplyrefuse to honor the check or to pass the matter to the customer'saccount representative who must determine whether it is in the long termbest interest of the financial institution to cover the check. Again,this item by item approach in handling such matters diverts theresources of the financial institution that may be better spent on othermatters. Having to handle such matters on an ad hoc basis makes itdifficult for a financial institution to allocate their resources. Forexample, an account representative may go for a long period of timewithout having to handle issues concerning an overdraft or overdrafts,then have to handle many of them on one day. Other issues that theaccount representative had to handle on that day may have to besacrificed in order to handle the overdrafts. Given the limited amountof information that may be available to the account representative, itmay be difficult for the representative to assess the risk and determinewhether it is in the best interest of the financial institution to coverthe overdraft. The shorter amount of time that a customer has been withthe financial institution, the more speculative this estimate is, andthe higher the risk to the financial institution. Also, because thisprocess is judgmental, the risk assessment may not be uniform orconsistent from one service representative to another. This opens theadditional risk of discrimination through unequal or disparate treatmentof account holders.

To decrease some of the risk, the financial institutions look to theinformation presented to them when the customer opened the account.Before a financial institution opens a demand deposit or a checkingaccount for a prospective customer, the financial institution ordinarilyrequires that the prospective customer supply a certain amount ofinformation. Such information is required to verify personalidentification and to provide an alert against any negative information,such as lack of steady employment, lack of extended time at any oneresidence, or past poor relationships with other financial institutions.A preliminary screening of prospective customers serves to increase thepredictability and reliability of subsequent transactions and thusallows the financial institution to better manage the account. Acustomer that provides information that satisfies the standards of thefinancial institution to open a checking account is said to be“qualified”. Standards of a financial institution include thepresentment of a government issued photo identification card thatconfirms the individual's identity, and successfully passing anassessment of prior checking performance at other financialinstitutions, for example, screening for no negative past checkingperformance. Although, these are generally minimal requirements,financial institutions have the discretion to further requiresatisfactory credit history.

However, the information provided to the financial institution toqualify for an account typically does not provide the financialinstitution with specific information on the normal check writing habitsof the particular customer or other customers similarly situated as theparticular customer. Does the customer typically maintain a minimumamount of money in the checking account to cover certain payments whileother money is, for example, kept in a deposit account? Does thecustomer typically write checks to cover the customer's rent or mortgagepayment or automobile payment just before or contemporaneously withmaking a deposit so that the financial institution is often presentedwith one or more checks before the deposit funds have cleared? Does thecustomer, when contacted by the customer's account representative aboutthe possible overdraft, immediately rectify the situation such as byauthorizing amounts to be shifted from, for example, a deposit accountto the checking account?

With only the scant qualifying information, and without specificinformation concerning the customer's behavior, the financialinstitution must make a decision whether to cover the check. Financialinstitutions, therefore, are in need of a system and methods to assistthem in determining for what customers to pay on unsupported checks andthe extent to which such checks should be covered. The present inventionsatisfies the demand.

SUMMARY OF THE INVENTION

The invention relates to a system and methods by which the riskassociated with a new opportunity or new or ongoing relationship may beassessed. One example of such new opportunity or new relationship forwhich the present invention may be used to assess the risk is thatconcerning a potential new customer of a financial institution. Thepresent invention may be used to assess whether a new customer should betaken on as a customer and, if so, to what extent should the possiblefull range of account benefits be provided to the new customer.

Another example of such new opportunity or new relationship is thatconcerning a candidate for employment. The system and methods may beused, for example, to assess whether a candidate for employment shouldbe hired, and, if so, what responsibilities should the new hire begiven.

An example of an ongoing relationship for which the present inventionmay be used to assess the associated risk is that concerning a currentcustomer of a financial institution. The system and methods of thepresent invention may be used to determine whether the range of accountbenefits previously provided to the customer should be eliminatedaltogether, narrowed, or expanded. The present invention provides asystem and methods that assist those that are presented with a propertytransfer request to make more fully informed decisions whether to honorthe transfer request when the property in a customer's account areinsufficient to cover the request. The system and methods may beemployed by the financial institution at the time the customer firstestablishes a relationship with the financial institution or later.

The present invention may also be used to assess risk in a landlordtenant relationship. The landlord can assess the risk of a prospectivetenant in order to determine whether or not to rent to the prospectivetenant and, if so, the amount of the security deposit. Further, alandlord may use the present invention's system and methods to assessthe original security deposit at the time of renewal of the lease. Forexample, the landlord may return partial or all of the original securitydeposit enticing the tenant to renew the lease, or increase the amountof the security deposit to discourage the tenant from renewing thelease.

The system and methods are used, in part, to set a monetary standard orstandards below which an overdraft or overdrafts would be honored.Unlike existing overdraft systems—which utilize an overdraft servicethat is set at a low level in order that the financial institution mayassume the least amount of financial risk and apply it at individualfinancial institutions widely dispersed over a large geographic area—thesystem and methods according to the present invention do not set thisstandard or standards wholly based upon the individual personalcharacteristics of a customer or financial institution customer; rather,the system and methods set this standard, in part, by depersonalizedstatistical third party information for the geographic region in whichthe financial institution is located. The depersonalized statisticalthird party information includes the shelter and transportation costsfor the area where the financial institution is located. Transportationcosts include the monthly payment or other payment for the purchase orlease of an automobile. Shelter costs include the monthly payment orother payment for the purchase or lease of a dwelling.

The system includes three components, some or all of which the financialinstitution may use depending on whether the customer is an existingcustomer or a new customer.

For purposes of utilizing the system, the financial institution maydecide that an “existing customer” is a customer that has had a checkingaccount with the financial institution for any period of time—no matterhow small—or one that has had a checking account with the financialinstitution for greater than a certain minimum period of time (forexample, three months).

One embodiment of the system utilizes both a check verification reportand a credit rating score to determine whether to accept overdrafts froma new customer that do not exceed an overdraft service for newcustomers. Other embodiments of the system utilize personal anddepersonal information from third party sources.

For purposes of this application, third party sources includes creditbureaus such as Equifax, TransUnion and Experian, check reportingagencies—such as ChexSystems and TeleCheck, apartment rental trackingagencies, and public records such as criminal records.

A new customer may be considered by the financial institution to be acustomer that seeks to open a checking account (and, therefore, is notactually a checking account customer yet) or one that has had a checkingaccount but for a period of time less than that certain minimum periodof time set to qualify the customer as an “existing customer” (describedabove). The overdraft service for a new customer may be the same ordifferent (for example, higher) as that for an existing customer. Thecredit rating score is obtained for the new customer from a provider ofsuch services, such as Equifax, Experian, or TransUnion. The financialinstitution obtains also a check verification report from a provider ofsuch services. One such provider is “ChexSystem™”. The financialinstitution may choose to honor overdrafts only for those new customersthat obtain both an acceptable credit rating score and a satisfactorycheck verification report. However, if the check verification reportshows, for example, that the new customer has engaged in past fraudulentor other behavior deemed by the financial institution to be entirelyunacceptable, the financial institution can refuse to open a checkingaccount for those new customers. If the check verification report shows,for example, that the new customer has committed certain acts (such asabuse of checking privileges) but had not engaged in past fraudulent orother behavior deemed by the financial institution to be entirelyunacceptable, the financial institution can open a checking account forthe new customer provided the customer's credit rating score is at orabove a designated cut-off.

Differing overdraft amounts can also be determined on anaccount-by-account or customer-by-customer basis. For example, onecustomer would be allowed an overdraft of $1,000 while another customerwould be allowed an overdraft of $2,000.

In order to address overdrafts written by existing customers of thefinancial institution (“overdraft service”), the financial institutiondecides what the maximum amount of overdrafts that customers having acertain credit rating score will be honored by the financialinstitution. The amount of overdrafts could be a set amount for allcustomer accounts or could vary from customer to customer depending ontheir individual risk profile. For existing customers of the financialinstitution—such as those that had a checking account with the financialinstitution for more than three months—a credit rating score is obtainedfor the customer, for example, from Equifax, although it is within thefinancial institution's discretion to first obtain a check verificationreport for the existing customer.

In order to ensure that the decisions made with respect to new customersand existing customers were sound decisions, the system and methods maybe used to check on a periodic basis (such as annually) whether those towhom overdraft service was not extended can now be extended or whetheroverdraft service should continue to be provided to those to whom wereprovided such protection and whether the limit is to be increased,decreased or remain the same. In addition, the system and methods may beused to modify the amount of the overdraft service that will be honored.

The financial institution may adjust the standards with time to increaseor decrease those to whom overdraft service is extended such as byadjusting the designated cut-off of the credit rating score of thesystem and methods.

A financial institution that uses the system and methods will honor oneor more overdrafts written by a customer to whom overdraft service wasextended by the financial institution, provided the sum total of the oneor more overdrafts does not exceed the overdraft service limit. Forcovering the overdraft or overdrafts, the financial institution willassess a fee and notify the customer that the payment of the overdraftis due. The customer must deposit sufficient funds to cover theoverdraft or overdrafts within a stated period of time. If the customerdoes not deposit the required funds within the stated period of time,the financial institution may provide a second notice and/or take othersteps such as closing the customer's checking account and/or turning thematter over to a collection agency.

As a result of using the system and methods, the financial institutionwill have four options available to it. First, the checking account willbe opened and an overdraft service established for the account. As aresult, the financial institution may honor overdrafts, up to the amountof the overdraft service limit. Second, the checking account will beopened without any overdraft service. The financial institution will beleft to decide on an ad hoc basis whether to honor the overdraft. If,for example, an account representative is unable to decide, thefinancial institution would likely not honor the overdraft. Third, thefinancial institution may choose not to open the checking account forthe new customer or lastly, for an existing customer, close the account,reduce the limit, increase the limit, or add an overdraft capability ifthe account did not already have it.

One advantage of the system is that it permits financial institutions tomake more fully informed decisions with respect to overdrafts and riskassessment in advance of the actual presentation of a check thatoverdraws an account.

Another advantage is that it permits financial institutions to maintainor improve customer relationships by not refusing to honor checks thatare critical to the customer such as those that are more sizeable inamount and are drawn to pay the customer's rent, mortgage, or carpayment. Financial institutions, like other businesses in servicesindustries are always trying to maintain and improve customersatisfaction.

An added advantage of the present invention is that it provides aprotocol by which overdrafts are handled automatically and uniformly.Therefore, costly resources—such as the time of accountrepresentatives—need not be diverted on an ad hoc basis. The expensesassociated with handling overdrafts are decreased. In addition, theinvention avoids the possibility that different decisions will be madeby account representatives—thus, eliminating the possibility thatstandards will be applied inconsistently. Furthermore, the use of arisk-based system better allows a financial institution to manage riskbased on objective data, and to determine the level of risk, in aquantifiable way, that the institution wants to accept.

An additional advantage of the present invention is that by providingthis service to customers even for a fee, customers are more likely touse it, thereby providing an additional source of revenue for financialinstitutions.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a flow chart of the system and method according to oneembodiment of the present invention;

FIG. 2 is a Market Limit Score Worksheet according to one embodiment ofthe present invention;

FIG. 3 is an Institutional Limit Score Worksheet according to oneembodiment of the present invention;

FIG. 4 is a Checking Account Approval Matrix for new checking accountsaccording to one embodiment of the present invention;

FIG. 5 is a Checking Account Approval Matrix for existing checkingaccounts according to one embodiment of the present invention; and

FIG. 6 is a summary matrix of the overdraft service according to oneembodiment of the present invention.

DETAILED DESCRIPTION

The present invention will now be described in detail with reference toone of many possible embodiments thereof as illustrated in theaccompanying drawings. In the following description, numerous specificdetails are set forth in order to provide a thorough understanding ofthe present invention. It will be apparent, however, to one skilled inthe art, that the present invention may be practiced without some or allof these specific details. In other instances, well known process stepsand/or structures have not been described in detail in order to notunnecessarily obscure the present invention.

In accordance with one application of the present invention, improvedrisk assessment techniques are provided that optimize financialinstitution revenue while controlling losses resulting from thefinancial institution covering an overdraft or overdrafts. Unlike priorart risk assessment techniques, which typically employ only historicalpayment data for financial risk assessment purposes, the presentinvention assesses risk in part by depersonal information for thegeographic region in which the financial institution is located. Thefinancial institution evaluates depersonal information in addition topersonal information to determine the amount of overdraft service, ifany, to offer a particular customer. Depersonal information and personalinformation can include, for example, shelter and transportation costs.Personal information, in addition, can include credit rating score andcheck history.

Fees are typically charged if a customer's withdrawal exceeds the amountof funds in the customer's account. The individual financial institutionwill assess the applicable fee established in advance by thatinstitution; although, whether a financial institution charges a fee iswithin the discretion of each financial institution. The embodiment ofthe present invention described is a method of assessing risk todetermine which customer's receive overdraft service and the amount ofthe benefit.

When a customer writes a check or withdraws in excess of the amountwithin the customer's account, the financial institution is presentedwith several options. The financial institution may provide overdraftservice by advancing funds to the customer to cover the deficit, such asan electronic fund transfer (“EFT”) from another account if the customerhas one (such as a deposit account, checking account or money marketaccount) or from a line of credit, such as a credit card. The financialinstitution may refuse to pay the deficit. Finally, the financialinstitution may offer overdraft service where the financial institutionvoluntarily covers the deficit determined by the method of the presentinvention.

To determine whether a customer is offered overdraft service and theamount of the benefit, a Market Limit Score Worksheet and InstitutionalLimit Score Worksheet are completed in addition to consulting a CheckingAccount Approval Matrix. The Market Limit Score Worksheet provides amarket limit score based on depersonal information for the locationwhere the financial institution is located. An institutional limit scoreis then calculated. While the market limit score is based on depersonalinformation, the institutional limit score is based on personalinformation. The depersonal information and personal informationincludes shelter, utilities and transportation costs, although variousother variables can be considered.

After the market limit score and institutional limit score aredetermined, a recommended limit score is calculated. The recommendedlimit score, or check limit, is the amount the financial institutionoffers customers to optimize its revenue while controlling losses. Thefinancial institution can adjust the check limit upon the financialinstitution's discretion. Adjusting the check limit above therecommended limit score increases the level of risk and revenuegenerated. Adjusting the check limit below the recommended limit scorereduces the level of risk and revenue generated. Adjustments may be madeaccording to the business practices and objectives of the financialinstitution. Thus, the limits defined by large corporate financialinstitution entities, having multiple branch offices and locations, maybe differentially adjusted from smaller financial institutions orindependent credit unions.

FIG. 1 illustrates, in accordance with one embodiment of the invention,a flow chart of the system and method of assessing financial risk 100 todetermine which customer accounts to approve for overdraft services andthe amount of approval. The market limit score is calculated in step102. The market limit score is calculated from depersonal information,including the annual expenses of shelter, utilities and transportation,determined by socioeconomic data estimated for the region where thefinancial institution is located. The data is obtained from cost ofliving indices collected by the United States Census Bureau, ConsumerPrice Index and other publicly available statistical data sources.Shelter, utilities and transportation can be determined to at least aproper approximation by estimating ordinary and expectable price levelsfor basic commodities from socioeconomic data.

In step 104, the institutional limit score is calculated from personalinformation of the customers in the financial institution's market. Theinstitutional limit score is the true median or average value ofshelter, utilities and transportation for the actual customers of thefinancial institution. The data is collected by assessing theinstitution's loan portfolio for mortgage loans, car loans, and creditcard loans. The median and mean average payment for each of thesecategories with respect to the market area where the institution islocated is compared to the financial institution's customers actualdata.

The recommended limit, or check limit, is objectively determined in step106 based on the market limit score and institutional limit score. Thecheck limit is the amount the financial institution offers customers tooptimize its revenue while controlling losses. Optimal risk rewardtradeoff occurs by selecting a check limit between the institutionallimit score and market limit score. The check limit is entered into theChecking Account Approval Matrix (step 112).

In step 108, a customer's check verification report is obtained from aprovider of such services. ChexSystem™ and TeleCheck™ are providers ofcheck verification reports. The ChexSystem™ network is made up of memberfinancial institutions and credit unions that regularly contributeinformation on mishandled checking and deposit accounts to a centrallocation. This information is shared with financial institutions to helpthem assess the risk of opening new accounts or the risk of offering anexisting customer overdraft service. ChexSystem™ provides verificationservices to aid financial institutions in identifying account applicantswho may have a history of account mishandling, for example, people whoseaccounts were overdrawn (NSF activity) and then closed by them or bytheir financial institution. Other verification factors include debitcard revocation, repeated drawings on uncollected funds, overdraftservice abuse, deposit account abuse, writing a check on a closedaccount, ATM machine abuse, and providing false information when openingan account. The financial institution, within its discretion, may decidenot to consult ChexSystem™ data for existing customers, although,ChexSystem™ data is always obtained on new customers. The ChexSystem™data obtained is compared to corresponding data in the Checking AccountApproval Matrix (step 112).

Check verification reports include negative information and abuseinformation, further explained below. If the customer's checkverification report contains certain negative information, the newcustomer is not offered a checking account (no account opens) or anexisting customer's checking account is closed in step 114.

Existing customers and new customers may be defined within thediscretion of the financial institution. For example, if a checkingaccount has not been open for three or more months, the customer isconsidered a new customer. A checking account that has been open forthree months or more defines an existing customer.

After the ChexSystem™ data is obtained, and if no certain or pre-definednegative information was revealed, the customer's credit rating score isobtained in step 110. Credit rating scores can be obtained fromproviders such as Equifax, Experian or TransUnion. The credit ratingscore obtained for a particular customer is compared to correspondingdata in the Checking Account Approval Matrix (step 112).

The Checking Account Approval Matrix, in step 112, is reviewed. Thecustomer's ChexSystem™ data and credit rating score are found on thematrix to reveal an alphabetic designation code that defines thefinancial institution's option.

One of three results is obtained from the Checking Account ApprovalMatrix in step 114. First, the financial institution provides a checkingaccount with overdraft service, in which case the financial institutioncovers an overdraft or overdrafts, up to the check limit, when acustomer withdraws an amount that exceeds the amount of funds in thecustomer's account. Second, the financial institution provides asub-prime checking account, in which case the financial institution doesnot cover an overdraft or overdrafts. A sub-prime checking account is abasic or standard checking account without “frills” or additionalbenefits. Lastly, the financial institution does not provide a checkingaccount—a checking account is not opened for a new customer or thechecking account is closed for an existing customer.

FIG. 2 illustrates one embodiment of a Market Limit Score Worksheet 200according to the invention. Through the use of the Market Limit ScoreWorksheet 200, a market limit score 202 based on depersonal informationmay be calculated. Depersonal information includes information such asthe annual expenses of shelter 204, utilities 206, and transportation208, determined by socioeconomic data estimated for the region where thefinancial institution is located. Shelter 204 includes, for example,mortgage or rent data. Utilities 206 include, for example, data fortelephone, cable, gas, electric, water, garbage and fuel fortransportation. Transportation 208 includes, for example, car payment orlease payment data. The socioeconomic data is compiled from sources suchas Bureau of Labor, Census Bureau, Customer Price Index (CPI), orMetropolitan Statistical Area (MSA) data. Information from such sourcesestimates the costs of shelter 204, utilities 206, and transportation208. This depersonal information is typically assessed for the regionwhere the financial institution is located, for example, East 216,Midwest 218, South 220, and West 222 for the United States. Thegeographical areas of East 216, Midwest 218, South 220, and West 222 aredefined by the Census Bureau.

After the annual expenses of shelter 204, utilities 206, andtransportation 208 are estimated for the region where the financialinstitution is located, they may be subjected to an adjustmentpercentage 214, if necessary. The adjustment percentage 214 isdetermined from Customer Price Index data. It is a percent of thestandard or base line values of shelter 204, utilities 206, andtransportation 208 for the particular area where the financialinstitution sits. The baseline values are determined by location. Thereare four baselines, one for each region of the country: East, Midwest,South, and West. The adjustment percentage 214 may be different for eachvalue of shelter 204, utilities 206, and transportation 208. An actualvalue 224 is determined after the adjustment percentage 214 is applied.Each actual value 224 for shelter 204, utilities 206, and transportation208 are summed to obtain total annual value 210. The total annual value210 is divided by twelve for a monthly market limit score 202.

FIG. 3 is an Institutional Limit Score Worksheet according to theinvention. The Institutional Limit Score Worksheet 300 provides theinstitutional limit score 302 calculated from personal information ofthe customers in the financial institution's market. The institutionallimit score is the true median or average value 312 of shelter 304,utilities 306, and transportation 308 for the actual customers of thefinancial institution. The true median or average annual value (orcommonly statistical value) 312 of shelter 304 and transportation 308can be obtained, for example, through actual financial statements of thecustomer, from information the customer presented to the financialinstitution when the customer opened the account, or from the average ofall the financial institution's customers for which they have paymentinformation. The true median or average annual value of utilities 306can be obtained, for example, through a customer's credit card. Acustomer's credit card data provides a valuable correlation or proxy forutilities 306, which is typically two times the median or average annualcredit card payment. The true median or average value 312 for shelter304, utilities 306, and transportation 308 are summed to obtain totalannual value 310. The total annual value 310 is divided by twelve for amonthly institutional limit score 302.

A recommended limit score, or check limit, is objectively orsubjectively determined based on the values of the market limit score202 and institutional limit score 302. The recommended limit score, orcheck limit, is the amount the financial institution covers customeroverdrafts to optimize its revenue while controlling losses. Thefinancial institution optimizes the risk reward tradeoff by selecting acheck limit between the institutional limit score 302 and market limitscore 202. An example of objectively determining the check limit iscalculating an average of the market limit score 202 and institutionallimit score 302. An example of subjectively determining the check limitis interpolating a value between the market limit score 202 andinstitutional limit score 302.

The financial institution can adjust the check limit upon the financialinstitution's discretion and based on tolerance and risk policy. Factorsa financial institution would adjust the check limit include: marketconditions, number of branches the financial institution comprises,number of markets the financial institution serves, location of thefinancial institution and appetite for risk. The financial institutionmay opt to tier the check limit, for example, the check limit could beincremented and/or decremented by one hundred dollars $100 before it isinserted into the Checking Account Approval Matrix. The increment ordecrement of the check limit is entirely up to the financialinstitution's discretion. For example, the financial institution mayincrement the check limit because they want to attract a more affluentcustomer than they currently have and a higher limit would be moreattractive.

The check limit is inserted into the Checking Account Approval Matrix.FIG. 4 is a Checking Account Approval Matrix for new checking accountsaccording the invention and FIG. 5 is a Checking Account Approval Matrixfor existing checking accounts according the invention. The check limitis inserted into the Checking Account Approval Matrix from which theoverdraft service is determined. The matrix determines if a customerwill receive overdraft service, and, if so, for what amount. The amountcan be the same for all customers or different for each customer basedupon the risk analysis of the matrix. The matrix is used by thefinancial institution at the time the customer opens an account or toevaluate an existing customer.

Based on review of the matrix, one of three conclusions will be reachedby the financial institution for a particular customer, either a new orexisting customer. First, the financial institution provides a checkingaccount with overdraft service, in which case the financial institutioncovers an overdraft or overdrafts, up to the check limit, when acustomer withdraws an amount that exceeds the amount of funds in thecustomer's account. Second, the financial institution provides asub-prime checking account, in which case the financial institution doesnot cover an overdraft or overdrafts. Lastly, the financial institutiondoes not provide a checking account—a checking account is not opened fora new customer or the checking account is closed for an existingcustomer. A new customer may be defined as having a checking accountwith the financial institution for three months or less. An existingcustomer may be defined as having a checking account with the financialinstitution for three months or more.

FIG. 4 is a Checking Account Approval Matrix for new sharedraft accountsaccording the invention. The Checking Account Approval Matrix for newchecking accounts 400 includes personal sharedraft history data 402, orChexSystem™ classification data. Sharedraft history verification datacan be obtained from providers including ChexSystem™ or TeleCheck™. TheChecking Account Approval Matrix 400 also includes Consumer ReportingAgency or credit bureau (CRA) score 408 and the check limit 410.

The CRA score 408 values are inserted into the matrix 400. The CRAscores are empirically derived using proven statistical methodology andpredicts the likelihood of loss at given check limits 410. For example,a high score may have a statistical prediction of low loss but as thescore decreases the likelihood of loss increases. The CRA score 408 isused to determine the amount of the overdraft or check limit 410allowed. Customers with a higher score (low risk), may be entitled to ahigher check limit while customers with a lower score (high risk) may beoffered a lower check limit. Overdraft is not offered typically wherethe risk is too great. The CRA score 408 column may consist of differingvalues including varying increments. For example, Checking AccountApproval Matrix 400 includes CRA score 408 values of 800, 614, less than500, and no score.

The check limit 410 is based on the values of the market limit score 202and institutional limit score 302. The financial institution may opt totier the check limit within the Checking Account Approval Matrix. Forexample, the check limit could be incremented and/or decremented by onehundred dollar $100 amounts. Checking Account Approval Matrix 400includes check limit 410 of, for example, $1200, non-sufficient funds(NSF), and zero. The check limit 410 can be tiered, such that the checklimit is incremented and/or decremented by one hundred dollar $100amounts using the market limit score and the institutional limit scorestatistical average as a base. For example, a Consumer Reporting Agencyscore 408 of 660 corresponds to a check limit 410 of $1300. and aConsumer Reporting Agency score 408 of 680 corresponds to a check limit410 of $1400.

This ChexSystem™ classification data 402 includes negative information404 and abuse information 406. Negative information 404 includes, forexample, writing checks on a closed account, false information used inopening an account, excessive drawing on uncollected funds, automaticteller machine (ATM) abuse, transactions involving forgery, transactionsinvolving draft returned stop payment, or transactions involving itemsbelonging to a deceased party. The negative information 404 listed abovecorresponds to a code within the ChexSystem™ report. For example, acustomer's ChexSystem™ report that reveals a negative code of B definesthat the customer wrote checks on a closed account.

Abuse information includes, for example, non-sufficient funds (NSF),abuse of overdraft protection, share account abuse, debit card revoked,account abuse of electronic transfer account (ETA), unsatisfactoryhandling, drawing against uncollected funds, transactions involvingitems or checks returned as uncollectable, overdrafts and unintentionalaccount abuse. The abuse information 406 listed above corresponds to acode within the ChexSystem™ report. For example, a customer'sChexSystem™ report that reveals an abuse code of F defines that thecustomer abused overdraft protection.

When a new customer applies for a checking account, the financialinstitution obtains ChexSystem™ classification data 402 for thecustomer. If a new customer's ChexSystem™ classification data 402, orpersonal sharedraft history data, includes negative information 404, thefinancial institution does not offer the new customer a checkingaccount.

If a new customer's ChexSystem™ classification data 402 includes abuseinformation 406, the financial institution either offers the newcustomer a checking account with overdraft service, a checking accountwithout overdraft service or no checking account opens. To determinewhat type of account to offer the new customer, the customer's creditrating score 408 is obtained. Credit rating scores can be obtained fromConsumer Reporting Agencies such as Equifax, Experian, or TransUnion.The higher the credit rating score the better the customer's credit. Thecustomer's credit rating score is compared the Consumer Reporting Agencyscore 408 of the matrix 400.

The overdraft service offered to the customer is determined by locatingthe abuse information 406 from the customer's ChexSystem™ report inaddition to the customer's credit rating score in the matrix 400. Again,if the customer's ChexSystem™ report shows any negative information 404that is considered serious, the customer is not offered a checkingaccount and the customer's credit rating score is not obtained. Afterlocating the customer's abuse information 406 in the matrix 400, thecustomer's credit rating score is located within the Credit ReportingAgency score 408 column. An alphabetic designation code is obtained inthe matrix 400 where the abuse information 406 column meets thecustomer's credit rating score within the Credit Reporting Agency score408 column. Depending on the alphabetic designation code obtained, thefinancial institution either offers the new customer a checking accountwith overdraft service, a sub-prime checking account, in which case thefinancial institution does not cover an overdraft or overdrafts, or thefinancial institution does not open a checking account for the newcustomer. For example, an alphabetic designation code of S defines thatthe financial institution provides a sub-prime checking account, inwhich case the financial institution does not cover an overdraft oroverdrafts. An alphabetic designation code of N defines that thefinancial institution does not provide a checking account—a checkingaccount is not opened for the new customer. An alphabetic designationcode of R defines that the financial institution provides a checkingaccount with overdraft service, in which case the financial institutioncovers an overdraft or overdrafts, up to the check limit, when acustomer withdraws an amount that exceeds the amount of funds in thecustomer's account. If the alphabetic designation code is R, the checklimit 410 column is consulted for the overdraft service amount. This isthe amount the financial institution covers an overdraft or overdraftswhen a customer withdraws an amount that exceeds the amount of funds inthe customer's account. Examples are presented below.

If a new customer's ChexSystem™ report reveals negative information 404such as a negative code B (the customer wrote checks against a closedaccount), the matrix reveals a N. The customer is not offered a checkingaccount with the financial institution, therefore, the customer's creditrating score does not need to be obtained.

If a new customer's ChexSystem™ report reveals abuse information 406such as an abuse code W (the customer drew against uncollected funds),the customer's credit rating score is obtained. If the customer's creditrating score is 680, the corresponding alphabetic designation codewithin the matrix 400 reveals a R. Therefore, the financial institutionwould offer the new customer a checking account with an overdraftservice. Referencing the check limit 410, the financial institutionwould cover up to $1200. if the customer withdraws more than the amountof funds in the customer's account.

If a new customer's ChexSystem™ report reveals abuse information 406,such as an abuse code A (non-sufficient fund (NSF) activity), thecustomer's credit rating score is obtained. If the Credit ReportingAgency does not have a credit rating score for the customer (thecustomer's credit rating score is “no score”), the customer is offered asub-prime checking account without overdraft service (since the matrix400 revealed an alphabetic designation code of S).

As another example, if the new customer's ChexSystem™ report revealsabuse information 406, such as unsatisfactory handling (abuse code U),the customer's credit rating score is obtained. If the customer's creditrating score is 480, the corresponding alphabetic designation codewithin the matrix 400 reveals a N. Therefore, the financial institutionwould not offer the new customer a checking account.

If a new customer's ChexSystem™ report reveals abuse information 406such as an abuse code 4 (previous overdrafts), the customer's creditrating score is obtained. If the customer's credit rating score is 613,the corresponding alphabetic designation code within the matrix 400reveals a S. Therefore, the financial institution would offer the newcustomer a sub-prime checking account without overdraft service. Thefinancial institution would return drafts, designated NSF, if thecustomer withdraws more than the amount in the customer's account.

As a final example, if the new customer's ChexSystem™ report revealsnegative information 404, such as ATM abuse (negative code of H) thecustomer's credit rating score is not obtained since the financialinstitution would not open or offer the customer a checking account.

FIG. 5 is a Checking Account Approval Matrix for existing checkingaccounts according the invention. The Checking Account Approval Matrixfor existing checking accounts 500 includes personal sharedraft historydata 502, or ChexSystem™ classification data. The ChexSystem™classification data 502 includes negative information 504 and abuseinformation 506 described above. The Checking Account Approval Matrix500 also includes Consumer Reporting Agency (CRA) score 508 and thecheck limit 510. Again, the check limit 510 can be tiered, such that thecheck limit is incremented and/or decremented by $100 amounts using themarket limit score and the institutional limit score statistical averageas a base.

The financial institution may assess an existing customer's accountannually to determine if the financial institution should provideoverdraft service. With an existing customer account, it is within thefinancial institution's discretion to obtain the existing customer'sChexSystem™ report or rely solely on the customer's credit rating score.

If the customer's ChexSystem™ report shows any negative information 504that is considered serious, the existing customer's account is closedand the customer's credit rating score is not obtained. If an existingcustomer's ChexSystem™ classification data 502 includes abuseinformation 506, the financial institution either offers the existingcustomer an overdraft service on their checking account or no overdraftservice is extended to the customer.

The overdraft service offered to the customer is determined by reviewingthe matrix 500 for the negative information 504 and abuse information506 obtained from the customer's ChexSystem™ report. If no negativeinformation 504 is returned in the customer's ChexSystem™ report, thecustomer's credit rating score is obtained.

After locating the customer's abuse information 506 in the matrix 500,the customer's credit rating score is located within the CreditReporting Agency score 508 column. An alphabetic designation code isobtained in the matrix 500 where the abuse information 508 column meetsthe customer's credit rating score within the Credit Reporting Agencyscore 508 column. Depending on the alphabetic designation code obtained,the financial institution either offers the existing customer overdraftservice with their existing checking account (alphabetic designationcode of R), a sub-prime checking account without overdraft service(alphabetic designation code of S), in which case the financialinstitution does not cover an overdraft or overdrafts or the financialinstitution closes the existing customer's checking account (alphabeticdesignation code of N). If the alphabetic designation code is R, thecheck limit 510 column is consulted for the overdraft service amount.This is the amount the financial institution covers an overdraft oroverdrafts when a customer withdraws an amount that exceeds the amountof funds in the customer's account. Several examples are presentedbelow.

The overdraft service is determined from all data in the CheckingAccount Approval Matrix 500. If an existing customer's ChexSystem™report reveals negative information 504 such as a negative code B (thecustomer wrote checks against a closed account), the matrix reveals a N.The existing customer's checking account is closed with the financialinstitution, therefore, the customer's credit rating score does not needto be obtained. Additional examples are presented below.

If an existing customer's ChexSystem™ report reveals abuse information506 such as drawing against uncollected funds (abuse code W), thecustomer's credit rating score is obtained. If the customer's creditrating score is 680, the corresponding alphabetic designation codewithin the matrix 500 reveals a R. Therefore, the financial institutionwould offer the existing customer an overdraft service on the checkingaccount. Referencing the check limit 510, the financial institutionwould cover up to $1200. if the customer withdraws more than the amountof funds in the customer's account.

If an existing customer's ChexSystem™ report reveals abuse information506, such as an abuse code A (non-sufficient fund (NSF) activity), thecustomer's credit rating score is obtained. If the Credit ReportingAgency does not have a credit rating score for the customer (thecustomer's credit rating score is “no score”), the customer is notoffered overdraft service (since the matrix 500 revealed an alphabeticdesignation code of S). The existing customer maintains a sub-primechecking account without overdraft service.

If an existing customer's ChexSystem™ report reveals abuse information506, such as debit card revocation (abuse code K), the customer's creditrating score is obtained. If the customer's credit rating score is 488,the corresponding alphabetic designation code within the matrix 500reveals a S. Therefore, the financial institution would offer theexisting customer a checking account without overdraft service. Thefinancial institution would return the draft designated NSF if thecustomer withdraws more than the amount in the customer's account.

FIG. 6 is a summary matrix of the overdraft service according to theinvention. The summary matrix 600 illustrates the possible outcomesdescribed by the Checking Account Approval Matrix for new checkingaccounts and a Checking Account Approval Matrix for existing checkingaccounts. The summary matrix 600 illustrates a new customer as having achecking account with the financial institution for three months or lessand an existing customer as having a checking account with the financialinstitution for three months or more.

The ChexSystem™ report 604 is determined either good or bad. A goodChexSystem™ report is when the customer has no negative information.Although, the customer may have abuse information in their ChexSystem™report. A bad ChexSystem™ report is when a customer has negativeinformation, such as possible forgery. The Consumer Reporting Agencycredit rating scores 602 are listed in the summary matrix 600. Thecredit rating scores are split according to the financial institutionsdiscretion. Depending on the credit rating scores and the ConsumerReporting Agency used, the same credit rating score can be associatedwith different levels of potential risk, for example, a loss to thefinancial institution. Generally, a CRA score of 700 and above isconsidered low risk, a CRA score of 600 to 699 is moderate risk and 500to 599 is high risk. A CRA score below 500 is extremely high risk. Whilemost CRA providers have score sets that range from 1 to 800 there aresome that range from 100 to 900. The financial institution determinesthe credit ranges based on the likelihood of loss within each range. Thelikelihood of loss is derived from the CRA's statistical studies of theperformance of customers within each range. For example, one CRA mayshow that in the range of 700 to 720, the institution could expectlosses to be less than one half of one percent, an acceptable loss forthat particular institution. The same data may also show that in therange of 500 to 520, the institution could expect losses to be twopercent, an unacceptable amount for the institution, thus, customerswithin the 500 to 520 category would not receive the overdraft feature.For example, the credit rating scores are divided into five ranges: (1)614-800 (2) 500-613 (3) 1-499 (4) 0 (5) 1-800.

Depending on the customer's ChexSystem™ report 604 and credit ratingscore 602, the summary matrix 600 reveals whether the financialinstitution provides a checking account with overdraft service, thefinancial institution provides a sub-prime checking account, in whichcase the financial institution does not cover an overdraft or overdraftsor the financial institution does not provide a checking account—achecking account is not opened for a new customer or the checkingaccount is closed for an existing customer. To illustrate, an existingcustomer has a good ChexSystem™ report 604 and a credit rating score 602of 518, therefore, the financial institution should offer overdraftservice to the customer. The amount of the privilege is determined fromthe recommended limit, or check limit. As another example, a newcustomer has a bad ChexSystem™ report 604 and a credit rating score 602of 700, thus, the financial institution should not open or offer achecking account to the customer.

While the present inventions and what is considered presently to be thebest modes thereof have been described in a manner that establishespossession thereof by the inventors and that enables those of ordinaryskill in the art to make and use the inventions, it will be understoodand appreciated that there are many equivalents to the exemplaryembodiments disclosed herein and that myriad modifications andvariations may be made thereto without departing from the scope andspirit of the inventions, which are to be limited not by the exemplaryembodiments but by the appended claims.

1. A risk assessment method comprising: determining a market limit scorefrom depersonal information; calculating an institutional limit scorefrom personal information; providing a check limit from analysis of themarket limit score and the institutional limit score; entering the checklimit into a matrix that includes check verification data and creditrating score data; receiving a check verification report for a customerthat may contain negative information and abuse information; retrievinga credit rating score for the customer; comparing the check verificationreport with the check verification data of the matrix and the creditrating score with the credit rating score data of the matrix; obtaininga designation code from the matrix; and arriving at an assessment ofrisk associated with the designation code from the matrix.